UK service sector shrinks for first time in two years

Britain's services sector shrank for the first time in two years in December,
increasing the likelihood of the country sliding back into recession, as new
orders dropped and businesses reported "challenging" trading
conditions.

The Markit/CIPS services Purchasing Managers' Index (PMI) for services, which makes up three-quarters of the UK economy, dropped to 48.9 in December - its lowest reading since April 2009 - from 50.2 in November, confounding economists' forecasts for a small rise, according to the data released on Friday.

Markit said the figures, combined with mixed manufacturing and construction figures earlier this week, mean that Britain posted its worst quarterly performance for three-and-a-half years, and suggest the economy contracted by 0.2pc in the last quarter of 2012.

"The first fall in service sector activity for two years raises the likelihood that the UK economy is sliding back into recession," said Chris Williamson, chief economist at survey compilers Markit.

"The services PMI follows an equally disappointing construction survey for December, leaving manufacturing – which accounts for just 10pc of the economy – as the only bright spot."

It is the first time the services sector index has fallen below the 50 mark that separates growth from contraction since December 2010, when unusually heavy snow disrupted business.

Markit said a reduction in new business was the "principal factor" behind the fall in the service sector activity, with December's decline following a similarly sized decrease in November which marked the first back-to-back contractions of new work in the sector since mid-2009.

Mr Williamson added that, while bad weather is likely to have played a role in dampening service sector activity, "It is the first time the services sector index has fallen below the 50 mark that separates growth from contraction since December 2010, when unusually heavy snow disrupted business".

"Bad weather is likely to have played a role in dampening service sector activity in December, but the fact that incoming new business dropped for a second successive month suggests that underlying demand remains very weak and that activity may continue to fall in the New Year," Williamson said.

The services sector new business index dropped to 49.4 from 49.6, hitting its lowest level since December 2010.

The composite PMI, which combines surveys for the services, manufacturing and construction industry, fell to 49.9 from November's 50.1. Averaged over the fourth quarter as a whole, Markit said that the composite PMI was at its lowest level in three-and-a-half years.

Howard Archer, chied UK and European economist at IHS Global Insight, said the figures were "undeniably...very disappointing" and fuelled fears that the economy contracted in the final quarter of 2012.

"Given the dominant role of the services sector and the fact that it has recently been the healthiest part of the UK economy on the output side, the reported fall in activity in December is a significant blow for growth hopes," he added.

George Buckley at Deutsche Bank said the se PMI figures "obviously raise the risk" of the UK experiencing a triple-dip recession.

The Telegraph Investor

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